Wonkbook: Don’t read too much into the May jobs numbers

Posted by Ezra Kleinat 06:53 AM ET, 06/04/2012TheWashingtonPost

Last week brought a lot of bad economic news, and this week will doubtless bring a lot of hysterical commentary, so let's take a breath: There is a tendency to take whatever just happened and assume it forward. That's doubly true when the data is dramatic.

A jobseeker works on her resume at the education and employment area of N Street Village community center in Washington, D.C. on June 1.
(Andrew Harrer - BLOOMBERG)
And Friday's jobs report was dramatic. Analysts were expecting around 125,000 new jobs. We barely got half that. And the bad news didn't end there: We learned we'd added 49,000 fewer jobs in March and April than we'd thought. All of that is awful news. But it's not clear how much it actually tells us about how the labor market is likely to perform in June, or July, or August.

Remember, it was just a few months ago that we were celebrating what seemed to be a nascent recovery. We added more than 200,000 jobs in December, January, and February. And the commentary began to assume that this would continue. Economists began explaining why the economy was coming back. Pundits began gaming out how Mitt Romney would have to rethink his campaign strategy now that the economy was piling on jobs. (And, to show I don't just make this point when recoveries falter, here's a post from February in which I warned against making those arguments.)

Today, we're hearing the exact reverse set of extrapolations. Economists are explaining why the recovery is clearly faltering. Pundits are wondering how President Obama will run for reelection if the economy isn't adding jobs. Romney, in fact, is previewing a new slogan: "Putting Jobs First."

There's reason to believe that economic growth will be weak through the rest of the year. China and India are slowing down. The euro zone is, once again, threatening to tear itself apart. Republicans in Congress are talking up their intention to force another debt-ceiling showdown. There's huge uncertainty over how Congress will resolve the looming expiration of the Bush tax cuts and the scheduled spending cuts. And there's little chance that either Congress or the Federal Reserve will respond to these threats with more support for the flagging economy. So if you want to tell a story in which things get worse this year rather than better, it's fairly easy to do.

But the May jobs report shouldn't figure to heavily into your thinking. For one thing, some of the bad news in recent months is payback for the good news in the beginning of the year. "Our best guess is that warm weather added 100,000 to the level of payrolls cumulatively through February, and that this unwound over the last three months," wrote Zach Pandl and Jan Hatzius of Goldman Sachs. "In March though May, payroll growth averaged 96k per month. Thus, excluding the weather payback effects, the underlying pace of job growth was likely around 120-130k during this period."

Macroeconomic Advisers was similarly cautious in their reading of the latest numbers. "We don't view the deceleration in employment over the past couple of months as the leading edge of a more pronounced and general weakness as it follows several months of stronger growth; some of the deceleration likely reflects payback from weather effects that boosted employment last winter," they wrote. And while they see substantial risks for the economy over the next few months, they think "the negative effects from these developments are offset, in part, by sharp reductions in energy prices that are boosting growth of real disposable personal income and adding support to our forecast for real consumer spending."

Nothing I'm saying here should be taken as particularly optimistic: It's clear that the economy remains stuck in low gear, and it's all too easy to see how bad decisions out of Europe, bad numbers out of the emerging markets, and news out of Congress lead to further deterioration as the years goes on. But, a few months ago, a lot of smart people thought it was easy to see how better decisions out of Europe, a soft landing in China, relative calm in Congress, and surprisingly good news out of the American labor market were going to lead to a better 2012 than anyone had predicted. It looks like they were wrong then, but that should also remind us that they could be wrong now.

1) Global lending is contracting at the fastest pace since the financial crisis. "The Bank for International Settlements (BIS) said cross-border loans fell by $799bn (£520bn) in the fourth quarter of 2011, led by a broad retreat from Italy, Spain and the eurozone periphery. Lending to banks in the eurozone fell $364bn or 5.9pc, with drastic reductions of 9.8pc in Italy and 8.7pc in Spain. The BIS's quarterly report said the decline in lending was 'largely driven by banks headquatered in the euro area facing pressures to reduce their leverage'. Banks must raise their core tier one capital ratios to 9pc by the end of this month or face the risk of partial nationalisation. The global Basel III rules are also pressuring banks to retrench. The International Monetary Fund said banks will have to slash their balance sheets by $2 trillion (£1.6 trillion) by the end of next year even in a 'best-case scenario'. This could reach €3.8 trillion if Europe mishandles the debt crisis." Ambrose Evans-Pritchard in The Telegraph.

2) Spain wants centralized control of national budgets in the eurozone. "Mariano Rajoy, Spain’s prime minister, has called for centralised control of national budgets in the eurozone in an unexpected gesture to mollify Brussels and Berlin on the eve of what is expected to be a crucial week for Madrid. Spain’s Treasury plans to auction sovereign bonds on Thursday, even though analysts say the country may soon need an international bailout and yields on its debt have risen close to the 7 per cent level...Two months ago, Mr Rajoy defiantly set a unilateral 2012 budget deficit target for Spain of 5.8 per cent of gross domestic product, saying the decision was a matter of national sovereignty. But he soon backtracked and yielded to EU pressure to cut the target to 5.3 per cent. At the weekend, he went a step further, calling for the creation of a 'European fiscal authority' to direct eurozone fiscal strategy, to harmonise the fiscal policies of the 17 euro countries and to allow 'centralised control of finances'." Victor Mallet in The Financial Times.

3) The House will hold repeal votes this week on health reform taxes. "With a Supreme Court decision on healthcare fast approaching, House Republicans are doubling down on efforts to bring attention to President Obama’s signature legislative issue. The effort, which includes votes on several measures to repeal taxes under the law, is intended to highlight unpopular aspects of the landmark bill as the presidential campaign between Obama and Republican Mitt Romney heats up. The House next week will consider measures to repeal taxes imposed on medical devices and over-the-counter medication. House Majority Leader Eric Cantor (R-Va.) announced the votes late last month, and called the tax on medical devices in particularly 'draconian' in a memo sent to GOP lawmakers...Only two Democrats on the Ways and Means Committee, Reps. Ron Kind (Wis.) and Shelly Berkley (Nev.) supported the medical device and over-the-counter drug bills at mark-up." Molly Hooper in The Hill.

4) JPMorgan Chase was warned about its risk controls. "A small group of shareholder advocates delivered an urgent message to top executives at JPMorgan Chase more than a year ago: the bank’s risk controls needed to be improved. JPMorgan officials dismissed the warning from the CtW Investment Group, the advocates, who also cautioned bank officials that the company had fallen behind the risk-management practices of its peers. Now, after disclosing a $2 billion trading loss at JPMorgan in May and watching the bank’s market value drop by more than $25 billion, those officials are expected to follow one of the group’s recommendations, strengthening the board panel that oversees risk. Still, that will not address weaknesses that critics say undermined the power of the bank’s chief risk officer. According to two former traders at the chief investment office and outside specialists, the chief risk officer was not focused on the huge credit market bets the chief investment office made that eventually went bad." Nelson Schwartz and Jessica Silver-Greenberg in The New York Times.

5) Tougher capital rules for big banks are coming. "Regulators trying to promote both sound financial institutions and economic growth are getting an earful from big banks about tougher capital rules. Citing their own studies and ones by independent economists, the banks say holding too much capital would force them to cut back on lending and raise the cost of loans, imperiling the fragile economic recovery. But some economists say regulations requiring plumper buffers for the largest banks are unlikely to crimp lending. The Federal Reserve is expected to propose specific rules Thursday, with more coming later. The requirements, which are aimed at staving off a repeat of the 2008 financial crisis, have been criticized by the banks as excessive. Yet J.P. Morgan Chase & Co., one of the institutions railing against the tougher rules, recently bolstered the case for them, after disclosing a trading loss of more than $2 billion." Victoria McGrane in The Wall Street Journal.

Top op-eds

1) SOROS: The euro will survive. "The likelihood is that the euro will survive because a breakup would be devastating not only for the periphery but also for Germany. It would leave Germany with large unenforceable claims against the periphery countries. The Bundesbank alone will have over a trillion euros of claims arising out of Target2 by the end of this year, in addition to all the intergovernmental obligations. And a return to the Deutschemark would likely price Germany out of its export markets - not to mention the political consequences. So Germany is likely to do what is necessary to preserve the euro - but nothing more. That would result in a eurozone dominated by Germany in which the divergence between the creditor and debtor countries would continue to widen and the periphery would turn into permanently depressed areas in need of constant transfer of payments." George Soros.

@TheStalwart: The beauty of Soros' speech is that he hits on a nagging question, which is: What made the market stop thinking of all EZ sovs as risk free?

2) SUMMERS: Governments should take advantage of low interest rates by borrowing more. "The question is not whether the current policy path is acceptable. The question is what should be done? To come up with a viable solution, consider the remarkable level of interest rates in much of the industrialised economies. The US government can borrow in nominal terms at about 0.5 per cent for five years, 1.5 per cent for 10 years and 2.5 per cent for 30 years. Rates are considerably lower in Germany and still lower in Japan...These low rates even on long maturities mean that markets are offering the opportunity to lock in low long-term borrowing costs. In the US, for example, the government could commit to borrowing five-year money in five years at a nominal cost of about 2.5 per cent and at a real cost very close to zero...So, what is to be done? Rather than focusing on lowering already epically low rates, governments that enjoy such low borrowing costs can improve their creditworthiness by borrowing more not less." Lawrence Summers in Reuters.

@RameshPonnuru: Persistent high unemployment is an avoidable social catastrophe.

3) KRUGMAN: We are already living in a Republican economy. "What should be done about the economy? Republicans claim to have the answer: slash spending and cut taxes. What they hope voters won’t notice is that that’s precisely the policy we’ve been following the past couple of years. Never mind the Democrat in the White House; for all practical purposes, this is already the economic policy of Republican dreams...What do I mean by saying that this is already a Republican economy? Look first at total government spending -- federal, state and local. Adjusted for population growth and inflation, such spending has recently been falling at a rate not seen since the demobilization that followed the Korean War...Much though not all of the responsibility for the policy wrong turn lies with a completely obstructionist Republican majority in the House...The fact is that we have already seen the Republican economic future -- and it doesn’t work." Paul Krugman in The New York Times.

4) PEARLSTEIN: Margaret Thatcher's commitment to austerity still looms large. "The ghost that hangs over the British economy these days is not that of the queen but of her least favorite prime minister, Margaret Thatcher, whose stubborn refusal to budge from her program of fiscal austerity in the face of a deepening recession 30 years ago still animates the policies of her Tory successors...If the economic logic for a change in policy was not compelling enough, you’d think the political logic would be, particularly given the sharp drop in the approval rating for the Cameron government as a result of the slowdown. But apparently that’s not the way it looks through the warped looking-glass of British politics. Anything that smacks of a U-turn on the party’s signature issue might be seen as an un-Thatcher-like sign of weakness, a blow to the pride and vanity of the prime minister and his chancellor, a threat to unity of a conservative party split between pragmatists and ideologues, a victory not for the country or the economy but for the opposition party." Steven Pearlstein in The Washington Post.

5) JOFFE AND RANDAZZO: Addresses of mortgages should be disclosed to investors. "Imagine going into a community bank and getting a mortgage but not telling the lender exactly where the house you want to buy is. You give the lending officer the zip code, and a few other clues about the home, but you walk out of the bank without having given your name or a street address. Sounds like a scam, right? Well, that’s how most mortgages are financed in the U.S. Investors in private, residential mortgaged-backed securities (or RMBS) are prevented by law from knowing the address for the mortgages they purchase. Naturally, a bank wouldn’t want to lend a few hundred thousand without knowing this information. We argue in a recent study by Reason Foundation that mortgage investors should be allowed the same privilege. It’s an important part of getting the housing market on a path toward recovery." Marc Joffe and Anthony Randazzo in Bloomberg.

Top long reads

Robert O'Harrow Jr. on the vulnerabilities of cyberspace: "Charlie Miller prepared his cyberattack in a bedroom office at his Midwestern suburban home. Brilliant and boyish-looking, Miller has a PhD in math from the University of Notre Dame and spent five years at the National Security Agency, where he secretly hacked into foreign computer systems for the U.S. government. Now, he was turning his attention to the Apple iPhone. At just 5 ounces and 4 1/2 inches long, the iPhone is an elegant computing powerhouse. Its microscopic transistors and millions of lines of code enable owners to make calls, send e-mail, take photos, listen to music, play games and conduct business, almost simultaneously. Nearly 200 million iPhones have been sold around the world...His campaign, aimed at winning a little-known hacker contest last year, points to a paradox of our digital age. The same code that unleashed a communications revolution has also created profound vulnerabilities for societies that depend on code for national security and economic survival."

Emma Brown on Violet Nichols and the debate over teacher tenure: "Twenty-one witnesses testified in the case to decide whether Violet Nichols should be allowed to continue teaching in the Fairfax County Public Schools. The last sworn in was Nichols herself. For days, she had listened poker-faced as Fairfax school officials picked apart her classroom performance, arguing that she was incompetent, intransigent and undeserving of her teaching position. Now it was her turn to tell a different story...Such hearings are central to the job protections known as tenure. Once politically untouchable, tenure has become a target for politicians from both parties who call it an obstacle to improving public education...What makes a good teacher? What makes a bad one? And how do you tell the difference? These are questions with no certain answers. So the national debate over tenure rages among politicians and policymakers who speak in terms of black and white. And the business of judging a teacher happens -- like so much in education -- in maddening shades of gray."

Still to come: Money transfer regulations are on the way; medical data breaches are worrying many; Coburn wants to cut conventions; a highway bill deal may not happen in time; and some interspecies snuggling times place.

Economy

Regulators announced new measures to prevent another flash crash. "Regulators on Friday announced new protections against market volatility, aiming to avert a repeat of the 2010 flash crash. The Securities and Exchange Commission adopted two measures: one would enforce market-wide circuit breakers to halt trading temporarily when trading goes awry; another would prevent erroneous trades from entering the system. In response to the new era of rapid-fire trading and wildly fluctuating stocks, the new round of sophisticated tools would address price disruptions that threaten the broader stability of the markets...The proposals, approved on Thursday and announced on Friday, will take effect by February. The efforts originated with exchanges and the Financial Industry Regulatory Authority, the nonprofit Wall Street watchdog...On May 6, 2010, a series of suspect trades led the Dow Jones industrial average to plummet more than 700 points in just minutes, only to recover moments later." Ben Protess in The New York Times.

The SEC is said to be investigating Facebook's IPO. "Two weeks after Facebook’s initial public offering, the hand-wringing over its dismal stock performance hasn’t died down-- and neither have the questions over how the IPO was carried out. Federal regulators are reviewing the offering, but some Democrats in Congress say their concerns about the IPO go well beyond the question of whether any laws were violated. The Securities and Exchange Commission is examining how the company, its underwriters and the NASDAQ stock market executed Facebook’s IPO, according to Capitol Hill staffers and members of Congress who’ve been briefed by regulators...But there are three major questions swirling around the troubled IPO: what caused the technical glitches that disrupted Facebook’s NASDAQ debut; whether Facebook gave privileged information to certain analysts and investors; and whether Morgan Stanley, the IPO’s lead underwriter, gave conflicting messages to different kinds of investors before the offering." Suzy Khimm in The Washington Post.

Regulations are coming for the money transfer industry. "As billions of dollars in fee income has evaporated at the nation’s largest banks because of regulations passed in the wake of the financial crisis, the money-transfer industry has escaped the crackdown. Soon, however, the companies, which are largely regulated by states, will be subject to new federal rules. Starting in February, they will have to disclose more to customers about transfer fees and currency exchange rates. The rules, part of the Dodd-Frank financial regulation law, will also require companies to give customers up to 30 minutes after a transaction to get a full refund. But consumer advocates are raising alarms that money-transfer companies face fewer restrictions because the rules do not touch the pricing of services...Money-transfer companies say that they offer an invaluable service for customers who might not have access to traditional banks and who would otherwise have no way of transmitting money to their families." Jessica Silver-Greenberg in The New York Times.

A bank oversight office failed to see foreclosure fraud. "The Office of the Comptroller of the Currency failed to spot widespread problems in the foreclosure practices of major banks between 2008 and 2010 because the agency’s examiners underestimated the mounting risks and were given outdated guidance that did not address how the industry had changed, according to a report issued Friday by the Treasury Department’s inspector general. As foreclosures skyrocketed across the country in the wake of the financial crisis, banks routinely filed flawed and fraudulent legal documents in a rush to keep up with the wave of defaults. But officials at the Office of the Comptroller of the Currency largely missed the fact that the mortgage servicers were cutting legal corners on such a large scale, according to Friday’s report...In addition, the report notes that the Mortgage Banking Comptroller’s Handbook used by bank examiners had not been updated since the late 1990s." Brady Dennis in The Washington Post.

Lawmakers are investigating regulators' oversight of J.P. Morgan Chase. "A federal agency that oversees J.P. Morgan Chase JPM & Co. is taking heat over how much it knew about risk-taking in the part of the bank that suffered more than $2 billion in trading losses. Sen. Sherrod Brown (D., Ohio) asked Comptroller of the Currency Thomas Curry in a letter Friday for details about the regulator's supervision of trading operations at the largest U.S. bank by assets. Mr. Brown also wants more information about the Office of the Comptroller of the Currency's 'process for reviewing trading operations' at J.P. Morgan and other big banks. The Senate Banking Committee, which includes Mr. Brown, is scheduled to hold a hearing Wednesday that will focus on the trading loss. The questions are a sign of growing pressure from lawmakers, mostly Democrats, to tighten controls on banks as a result of the mess at J.P. Morgan. Republicans have been slow to defend the company, partly because they see it as having been cozy with Democrats." Scott Patterson in The Wall Street Journal.

Cities' pension systems are under the spotlight. "Pension costs have been thrust to the fore as a major issue facing state and local governments across the US. In San Jose, costs have gone from $73m in the 2002 fiscal year to $245m in 2012, and lawmakers around the country will be watching the city’s battle closely as they consider ways to lower their own pension obligations. The initiative puts San Jose in the same camp as cities such as Providence in Rhode Island and Atlanta in Georgia, which have pushed for aggressive changes to their pensions systems. In San Diego, voters will also weigh in on Tuesday on measures to scale back pensions for new employees...The financial crisis, which brought investment losses for many funds, has compounded the underfunding of retirement promises to public employees. Low US interest rates have exacerbated the problem, at the same time as budgets have been constrained by lower tax revenues." April Dembosky and Nicole Bullock in The Financial Times.

@fivethirtyeight: Per capita global GDP did not grow AT ALL between 2000 B.C. and the Industrial Revolution. We're just reverting to the mean!

High-deductible insurance plans are on the rise. "Angela Wenger calls herself a self-reliant 'German Midwesterner' who hates to complain. But the Wisconsin mom was dismayed when husband Dan’s employer switched to an insurance plan that increased the family’s medical expenses tenfold. Two years ago, the company put white-collar workers on a 'high-deductible' plan similar to those typically bought by small businesses and individuals. The Wengers’ out-of-pocket medical costs, mainly for treating daughter Emma’s juvenile arthritis, soared from a few hundred dollars a year to $7,000, she says. The employer: General Electric, one of the largest companies in the world. High-deductible health plans, once deemed a last-resort, 'catastrophic' alternative for those with few resources, have gone Fortune 500...Half of all workers at employer-sponsored health plans -- including those working for the government -- could be on high-deductible insurance within a decade, according to a new paper from Rand Corp." Jay Hancock in The Washington Post.

Breaches of medical data are raising alarm. "As more doctors and hospitals go digital with medical records, the size and frequency of data breaches are alarming privacy advocates and public health officials. Keeping records secure is a challenge that doctors, public health officials and federal regulators are just beginning to grasp...Reporting rules adopted as part of the 2009 stimulus ensure that the public knows far more about medical data breaches than in the past. When a breach occurs that affects 500 or more patients, health-care providers must notify not only HHS but also the news media...According to an HHS database, more than 40 percent of medical data breaches in the past 21 / 2 years involved portable media devices such as laptops or hard drives. Since the enactment of HIPAA in 2003 until late last year, there were more than 22,000 complaints about violations of the law’s privacy rule. HHS assessed a monetary penalty only once, according to a report it gave to Congress." David Schultz in The Washington Post.

Domestic Policy

Some lawmakers want to stop funding conventions. "They railed against government bureaucrats for throwing a lavish conference, and now members of Congress are grappling with their own election year extravaganzas: The Republican and Democratic national conventions. In the aftermath of Congress’s public shaming of the General Services Administration for throwing an $800,000-plus conference in Las Vegas, lawmakers find themselves squeezed between their rhetoric on fiscal responsibility and the festivities celebrating their presidential nominees -- which is costing taxpayers more than $36 million. Enter Sen. Tom Coburn. The combative Oklahoma Republican plans to unveil bipartisan legislation this week that would prohibit future conventions from receiving federal dollars and would call on the committees running the parties’ conventions this year to return the money to the Treasury in order to pay down the national debt." Manu Raju in Politico.

A highway bill deal may not happen before the deadline. "House and Senate negotiators trying to agree to a long-term highway bill might need to work past June 30 to get there, House Majority Leader Eric Cantor (R-Va.) hinted Friday. In a colloquy with House Minority Whip Steny Hoyer (D-Md.), Cantor said he is mindful of the June 30 expiration of federal highway programs, but said twice that Republicans stand at the ready to make sure there is no interruption of these programs...Cantor's comments suggest both that negotiators will not reach a deal by June 30 and that some short-term agreement to extend funding could be reached...Hoyer replied that the Senate-passed bill would likely pass if it were brought up in the House, but Cantor did not respond. The Senate bill, S. 1813, would spend $109 billion over the next two years, and was approved in a bipartisan vote in the Senate. The House, in contrast, has only approved two temporary extensions and has included language requiring approval of the Keystone pipeline." Pete Kasperowicz in The Hill.

The House rejected several cuts to energy programs. "The House voted Friday to reject a series of amendments to a 2013 Energy and Water spending bill that would have cut $1.5 billion from the bill, revealing an ongoing split in the Republican Party on whether to seek more aggressive cuts. The largest spending cut proposal came from Rep. Tom McClintock (R-Calif.), which would have eliminated the Energy Efficiency and Renewable Energy account at the Department of Energy and used the $1.45 billion in savings toward deficit reduction. Like other Republicans, McClintock argued that this account needlessly spends money on questionable private investments that have not led to any measurable returns. But the House rejected McClintock's amendment in a 113-275 vote, in which 113 Republicans voted for it but 107 Republicans joined every Democrat in opposition. The House also killed an amendment from Rep. Jason Chaffetz (R-Utah) to reduce the Energy Efficiency and Renewable Energy account by $74 million." Pete Kasperowicz in The Hill.

Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.

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